Economic Substance Regulations FAQs and Filing Requirement
Economic Substance Regulation in Dubai, UAE is a new concept and many businesses, free zone companies, and economic entities are not familiar with its implications, process, and filing procedures. A compilation of all those queries related to Economic Substance Regulations is as follows:
Why is there a need in UAE to introduce ESR in Dubai, Abu Dhabi, Sharjah, UAE?
Majorly ESR has been introduced in UAE to ensure that companies that undertake certain business activities do not artificially attract profits. Having become a part of the European Union List of non-cooperative jurisdiction by the European Commission, it became mandatory for UAE to issue Economic Substance Regulations, which are similar to the requirements that were recently implemented in jurisdictions that include the Cayman Islands and Jersey.
How to meet the requirements of the economic substance test in Dubai, Abu Dhabi, Sharjah, UAE?
A Licensee meets the Economic Substance Test in Dubai, UAE with respect to a Relevant Activity in the subsequent cases:
- If the Licensee conducts State Core Income-Generating Activity in the State.
- If the Licensee is led and administered in the State in relation to that activity, provided the Licensee’s board of directors meets in the State at an adequate frequency having regard to the amount of decision-making required at that level.
- If there are adequate physical assets in the State or adequate level of expenditure on outsourcing to third-party service providers in the State, for the activities of the Licensee.
- In the case of State Core, Income-Generating Activity carried out for the relevant Licensee by another entity, if it is able to monitor and control the carrying out of that activity by the other entity.
Does the ESR application is limited to UAE entities that are part of a foreign multinational group/owned by foreign shareholders?
In the case of a UAE based Distribution Business, Service Centre Business, Headquarter Business, or High-Risk IP Business, the regulations will be imposed only if the organization transacts with foreign group entities. Other than that economic substance requirements will apply to all business entities that engage in relevant activities irrespective of the fact whether they belong to a foreign multinational group or not.
When is the first reportable financial year?
Economic Substance Regulation in Dubai, UAE applied to the financial year starting on or after 1 January 2019. For a UAE entity with 1 January 2019 – 31 December 2019 financial year, the first assessable period would be the same time period and for an entity with 1 April 2019 – 31 March 2020 financial year, the first assessable period would be 1 April 2019 – 31 March 2020.
What if a Licensee does not undertake any Relevant Activity during a fiscal year?
According to ESR, if a Licensees does not involve or conduct any relevant activity during a financial period then it does not have to meet the economic substance test and will be exempted from the process of notifying the regulatory authority and submitting an economic substance return.
What if a Licensee undertakes a Relevant Activity, but it does not earn any income/revenue from that activity during a reporting period?
In cases like these, the licensee will only have to submit a notification with the regulatory authority for the
Are all the offshore companies subject to economic substance Regulations?
Yes, offshore companies that undertake relevant activities are subject to regulations.
Who is exempt from the Regulations?
Licensees that are directly or indirectly at least 51% owned by the Federal or an Emirate Government, or a UAE Government body or authority need not comply with the regulations.
Should entities in liquidation file ESR notification?
All companies in liquidation should file a notification. However, if a free zone company has been dissolved, struck-off, or liquidated before the deadline for submission of the Notification then DIFC has confirmed that the entity needs not to file ESR notification.
If all income from the Relevant Activity is earned from outside the UAE, is the Licensee exempt from the Regulations?
No, the Licensee is not exempt from the Economic Substance Regulations.
Will economic substance be assessed on a Licensee individually on Licensee basis, or can Licensees that are part of the same group elect to be assessed on a ‘consolidated’ basis?
No, each Licensee must comply with the Regulations and demonstrate economic substance individually.
What should be included in the Economic Substance Report?
To satisfy the Economic Substance Regulation requirement in Dubai, UAE, companies must submit and ESR report which should the following:
- The value and type of income earned from the relevant activities
- The location of the activities and the property and/or equipment used to conduct the activities
- The number of employees, their qualifications, and the number of people responsible for conducting the activities
- A disclosure stating that the company has met the economic substance requirements.
What are the penalties for non-compliance with Economic Substance Regulation?
Failure to comply with the ESR (including providing inaccurate or incomplete information) may result in a fine of between AED 10,000 and AED 50,000 in any fiscal year. The fines increase to between AED 50,000 and AED 300,000 for the subsequent fiscal year.
|Free Zone Regulatory Authority||Due Date for ESR Notification|
|Dubai Silicon Oasis||25th May 2020|
|Dubai Airport Free Zone (DAFZ), RAK Economic Zone (RAKEZ)||31st May 2020|
|Dubai Aviation City Corporation||7th June 2020|
|Dubai International Financial Centre (DIFC)||12th June 2020|
|Dubai Multi Commodities Center (DMCC), RAK International Corporate Center, Ajman Free Zone, Abu Dhabi Global Markets, Sharjah Airport Free Zone, Hamriyah Free Zone||
30th June 2020
What deadlines need to be followed by UAE free zone companies while filing Economic substance regulation notification?
Where can a Licensee find about their Regulatory Authority?
The relevant Regulatory Authorities for the purposes of the Economic Substance Regulations UAE are set out in Cabinet of Ministers Resolution No. 58 of 2019. Generally, it is to be considered that the Regulatory Authority is the authority that has issued the trade license/permit to the business. The main exceptions to this general rule are for:
- Businesses registered onshore, which would need to submit their Notification with the Ministry of Economy.
- Banks that are licensed by the UAE Central Bank (for their entities that are not licensed/regulated by the DIFC or ADGM).
- Insurance companies that are regulated by the Insurance Authority.
- Investment Fund Management Businesses that are licensed by the Securities and Commodities Authority.
In case when a business entity has a dual license, it should only submit one Notification to the Regulatory Authority that issued the Licensee’s primary/main trade/commercial license when it was first incorporated/registered in the jurisdiction in which such Licensee has its premises, employees and other relevant Business Documents.
Who needs to submit a Notification?
A business must submit a Notification to its Regulatory Authority if it undertakes any of the following Relevant Activities during the relevant accounting period:
- Banking Business
- Insurance Business
- Investment Fund Management Business
- Lease-Finance Business
- Headquarter Business
- Shipping Business
- Holding Company Business
- Intellectual Property Business
- Distribution and Service Centre Business
What is meant by an ‘adequate’ or ’appropriate’ economic substance?
It has not been mentioned in the regulations and guidance about what to be considered a minimum standard for an adequate or appropriate economic substance. Thus, Regulatory Authorities are expected to take a pragmatic approach when assessing whether a Licensee has met the Economic Substance test, recognizing that the type and level of activity of a Licensee may fluctuate during the course of a financial period and from year to year.
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